Company Update

May 16, 2017

Rating matrix
Rating : Buy D-Link India (DLILIM) | 105
Target : | 140
Target Period : 18-24 months
Potential Upside : 34%
Hit on technologically obsolete inventory in Q4FY17
What’s Changed?
• D-Link reported 15.6% YoY decline in total revenues to | 154.8 crore
Target Changed from | 150 to | 140
as the company took a corrective action of doing away with
EPS FY18E Changed from | 11.4 to | 9.5
technologically obsolete inventory in the ongoing shift from 3G to 4G
EPS FY19E Introduced at | 11.7
Rating Unchanged in India. It is a one-time impact. Sales should recover in the coming
quarters
Key Financials
• The hit on the inventory resulted in an increase in inventory as a
percentage of sales to 89.8% vs. the average run-rate of 82-83%
| Crore FY16 FY17 FY18E FY19E
Net Sales 721.3 715.9 788.8 919.0
leading to a loss at the EBITDA level to the tune of | 1.7 crore
EBITDA 38.1 26.8 47.5 60.6 • Losses at the operating level dragged down overall profitability, hence
PAT 24.4 17.6 31.3 39.9 resulting in a PAT loss of | 1.3 crore
EPS (in |) 6.9 5.0 8.8 11.2 FY17 impacted by one offs, FY18, FY19 to be better
The management took a conscious call of deferring some sales with a
Valuation summary longer credit cycle in Q1FY17, impacting revenues in Q1. In the current
FY16 FY17 FY18E FY19E quarter, the company took a hit on the technologically obsolete inventory
P/E 15.3 21.1 11.9 9.3
in the ongoing shift from 3G to 4G in India, resulting in 15.6% YoY decline
Target P/E 20.4 28.3 15.9 12.5
EV / EBITDA 9.4 14.2 7.6 5.7
in total revenues to | 154.8 crore. It is a one-time impact. Sales should
P/BV 2.4 2.1 1.8 1.6 recover in coming quarters. It continues to see good traction in both its
RoNW 15.6 10.1 15.5 16.7 active and passive product portfolio, which constitutes about 65% & 35%
RoCE 24.2 14.8 22.9 25.3 of total revenues, respectively. With the inventory hit, the company is well
prepared with updated inventory matching the 4G needs. D-Link has also
Price Chart prepared itself for the GST regime, which will lead to added benefits
owing to input tax credits it receives on its imports. D-link is expected to
10,000 300 benefit from the government’s vision of pan-India internet connectivity
9,000
8,000 250 and its contribution in the upcoming smart city projects. We expect
7,000 200
topline to grow at 13.3% CAGR over FY17-19E to | 919.0 crore.
6,000
5,000 150
Deal with Reliance Jio to boost TeamF1 performance
4,000 The company had acquired TeamF1 Networks, which is in the business of
3,000 100
providing services in relation to the Network Security Software, test new
2,000 50
1,000 applications/enhancements and provide maintenance support for existing
0 0 applications. TeamF1 had entered announced its partnership with
Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Reliance Jio for delivering a state-of-the-art home gateway solution, joint
Price (R.H.S) Nifty (L.H.S) reference solutions for seamless “connected-home” experience for
Media, Television (IPTV, STB), Telephone (VoIP), gaming and internet,
Research Analyst which will lead to incremental revenues for the subsidiary. We expect
Bhupendra Tiwary revenues from the subsidiary to grow at 7.0% CAGR in FY17-19E to | 22.1
Bhupendra.tiwary@icicisecurities.com crore. There could be an upside risk to our estimates depending upon
further deal wins. The segment has a better margin profile and is
Sneha Agarwal accretive to overall margins of the company.
sneha.agarwal@icicisecurities.com
Available at inexpensive valuations; maintain BUY; target price | 150
D-Link is well prepared for GST. We remain bullish on the company’s
fundamental performance as it would be a vital contributor to the
government’s vision of pan-India internet connectivity owing to its wide
product portfolio. The recent alliance with Reliance Jio would also result
in incremental benefits considering the aggression being shown by Jio in
the Indian telecom space, We have rolled our valuations to FY19E and
expect D-Link to post revenue, EBITDA and PAT growth of 13.3%, 50.4%
and 50.3% CAGR in FY17-19E to | 919.0 crore, | 60.6 crore and | 39.9
crore by FY19E, respectively. The stock continues to be available at an
attractive valuation of 8.8x FY19E EPS. We value the stock at 12.5x FY19E
EPS of | 11.2 and arrive at a revised target price of | 140. We maintain
BUY recommendation on the stock.

ICICI Securities Ltd | Retail Equity Research

Variance analysis
Q4FY17 Q4FY16 Q3FY17 YoY (%) QoQ (%) Comments
Revenue 154.8 183.3 187.1 -15.6 -17.3 Corrective action taken by the company to take a hit on technologically obsolete
inventory led to losses in revenues
Other Income 0.3 0.8 1.2 -61.5 -72.6

Raw Material Expenses 119.5 154.8 168.1 -22.8 -28.9

Employee Expenses 6.5 7.5 8.2 -13.6 -21.1
Administrative Expenses 11.0 14.4 11.9 -23.6 -7.4
Marketing Expenses 0.0 0.0 0.0 NA NA
Changes in inventories of traded good 19.4 -2.0 -14.2 -1,084.2 -236.4
Other expenses 0.0 -0.6 0.0 -100.0 NA
EBITDA -1.7 9.2 13.2 -118.4 -112.8 Lower operating leverage along to inventory losses led to losses at the EBITDA level

EBITDA Margin (%) -1.1 5.0 7.0 -611 bps -813 bps
Depreciation 0.3 0.3 0.3 -10.4 -2.0
Interest 0.1 0.2 0.1 -19.4 -1.1

Total Tax -0.5 3.3 4.8 -113.8 -109.4

PAT -1.3 6.3 9.1 -121.2 -114.7
Source: Company, ICICIdirect.com Research

Change in estimates
FY18E FY19E
(| Crore) Old New % Change Introduced Comments
Revenue 913.4 788.8 -13.6 919.0 We believe the major benefits from Smart Cities and Digital India initiative will flow in from
H2FY18E onwards. Hence, we have tweaked revenue estimates in H1 leading to decline in
estimates
EBITDA 58.3 47.5 -18.6 60.6
EBITDA Margin (%) 6.4 6.0 -36 bps 6.6
PAT 40.6 31.3 -22.8 39.9
EPS (|) 11.4 8.8 -22.5 11.2
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

Financial summary
Profit and loss statement | Crore Cash flow statement | Crore
(Year-end March) FY16 FY17 FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E
Total operating Income 721.3 715.9 788.8 919.0 Profit after Tax 24.4 17.6 31.3 39.9
Growth (%) 12.6 -0.7 10.2 16.5 Add: Depreciation 1.7 1.5 1.7 1.7
Raw Material Expenses 604.5 566.4 634.2 738.2 Add: Interest Paid 0.4 0.5 0.8 0.8
Employee Expenses 43.4 42.3 32.3 37.7 (Inc)/dec in Current Assets -55.4 48.9 -20.1 -31.8
Administrative Expenses 53.3 51.7 56.8 63.7 Inc/(dec) in CL and Provisions 50.7 -89.0 8.9 15.9
Changes in inventories -17.9 28.7 0.0 0.0 CF from operating activities 21.7 -20.4 22.6 26.4
Total Operating Expenditure 683.3 689.2 741.3 858.4 (Inc)/dec in Fixed Assets -1.0 -0.9 -1.0 -1.0
EBITDA 38.1 26.8 47.5 60.6 Others -6.7 4.8 -12.0 -12.0
Growth (%) 12.5 -29.6 77.3 27.6 CF from investing activities -7.8 3.9 -13.0 -13.0
Depreciation 1.7 1.5 1.7 1.7 Dividend paid & dividend tax -3.0 -3.0 -3.0 -3.0
Interest 0.4 0.5 0.8 0.8 Interest Paid 0.4 0.5 0.8 0.8
Other Income 1.5 2.2 2.0 1.9 Others (3.0) 13.4 (6.6) (6.6)
PBT 37.5 27.0 47.0 60.0 CF from financing activities -5.6 11.0 -8.8 -8.8
Total Tax 13.1 9.3 15.7 20.2 Net Cash flow 8.3 -5.5 0.8 4.6
PAT 24.4 17.6 31.3 39.9 Opening Cash 0.9 9.2 3.7 4.5
Growth (%) 11.5 -27.6 77.7 27.2 Closing Cash 9.2 3.7 4.5 9.1
EPS (|) 6.9 5.0 8.8 11.2 Source: Company, ICICIdirect.com Research
Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios

(Year-end March) FY16 FY17 FY18E FY19E (Year-end March) FY16 FY17 FY18E FY19E
Liabilities Per share data (|)
Equity Capital 7.1 7.1 7.1 7.1 EPS 6.9 5.0 8.8 11.2
Reserve and Surplus 149.3 166.9 195.3 232.2 Cash EPS 7.3 5.4 9.3 11.7
Total Shareholders funds 156.4 174.0 202.4 239.3 BV 44.0 49.0 57.0 67.4
Total Debt 0.0 11.5 6.5 1.5 DPS 0.8 0.8 0.8 0.8
Deferred tax liability 0.0 0.0 0.0 0.0 Cash Per Share 2.4 2.8 3.3 3.8
Other Non Current Liabilities 0.1 0.1 0.1 0.1 Operating Ratios (%)
Total Liabilities 156.4 185.6 209.0 240.9 EBITDA Margin 5.3 3.7 6.0 6.6
EBIT / Total Operating income 5.0 3.5 5.8 6.4
Assets PAT Margin 3.4 2.5 4.0 4.3
Gross Block 27.7 28.6 29.6 30.6 Inventory days 50.4 35.4 35.4 35.4
Less: Acc Depreciation 8.5 10.0 11.7 13.4 Debtor days 86.9 78.7 77.1 73.3
Net Block 19.2 18.6 17.9 17.2 Creditor days 83.2 41.9 41.9 41.9
Capital WIP 0.0 0.0 0.0 0.0 Return Ratios (%)
Total Fixed Assets 19.2 18.6 17.9 17.2 RoE 15.6 10.1 15.5 16.7
Goodwill on consolidation 15.3 15.3 15.3 15.3 RoCE 24.2 14.8 22.9 25.3
Investments 5.0 - 12.0 24.0 RoIC 28.4 15.2 25.9 29.8
Inventory 99.7 69.4 76.4 89.1 Valuation Ratios (x)
Debtors 171.7 154.3 166.6 184.4 P/E 15.3 21.1 11.9 9.3
Loans and Advances 8.5 7.6 8.4 9.8 EV / EBITDA 9.4 14.2 7.6 5.7
Cash 9.2 3.7 4.5 9.1 EV / Net Sales 0.5 0.5 0.5 0.4
Other current assets 0.4 0.1 0.1 0.1 Market Cap / Sales 0.5 0.5 0.5 0.4
Total Current Assets 289.5 235.1 256.1 292.5 Price to Book Value 2.4 2.1 1.8 1.6
Creditors 164.4 82.2 90.5 105.5 Solvency Ratios
Provisions 6.9 1.7 1.9 2.2 Debt/EBITDA 0.0 0.4 0.1 0.0
Other current liabilities 5.1 3.6 3.9 4.6 Debt / Equity 0.0 0.1 0.0 0.0
Total Current Liabilities 176.5 87.5 96.4 112.3 Current Ratio 1.6 2.8 2.7 2.6
Net Current Assets 113.1 147.7 159.7 180.2 Quick Ratio 1.1 1.9 1.9 1.8
Other Non-Current assets 3.8 4.0 4.0 4.0 Source: Company, ICICIdirect.com Research
Application of Funds 156.4 185.6 209.0 240.9
Source: Company, ICICIdirect.com Research

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ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
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research@icicidirect.com

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